The 2011 tax year promises to be a very interesting one for U.S. citizens living overseas, as the Inland Revenue Services (IRS) plan to implement a tough campaign that is aimed at enforcing reporting requirements and dealing with non-compliance.
The U.S. government currently tax on citizenship, not residency, and it is therefore a legal requirement that all U.S. citizens living both at home and abroad file an annual tax return that discloses their global income and assets, regardless of whether such individuals owe money to the IRS and/or have paid tax in their host country. In addition to the annual tax return, all Americans are legally mandated to file an annual Reports of Foreign Bank and Financial Account (FBAR) if they hold any assets in foreign accounts that exceed $10,000 USD or more at any point during the tax year. You can read more about FBAR here: What is the FBAR requirement?
In 2010 the U.S. government passed the Foreign Account Tax Compliance Act, which was aimed at cracking down on individuals who avoided tax by introducing rules that required all foreign financial institutions to provide the IRS with information on accounts that were used by U.S. citizens.
The question remains how the U.S. could enforce decisions affecting Canadian citizens unless they enter the United States. The Canadian government says the Canada Revenue Agency will not collect penalties imposed by the IRS under FBAR. And Canada’s Department of Finance adds that the CRA won’t collect taxes the IRS says are owed to the U.S. by Canadian citizens under FBAR. Failure to adhere to this reporting requirement could lead to a 30 per cent tax on U.S.-connected payments to non-participating financial institutions and account holders. Discussing the regulations and the associated penalties, Emily McMahon, acting assistance secretary for tax policy with the U.S. Treasury, said in a February IRS release: “When taxpayers overseas avoid paying what they owe, other Americans have to bear a disproportionate share of the tax burden. FATCA is an important part of the U.S. government’s effort to address that issue.”
List of important tax deadlines in 2012
March 15th 2012: Deadline for all corporate tax returns (Forms 1120, 1120A and 1120S. Alternatively a 6-month extension request (Form 7004) must be filed.
April 17th 2012: Deadline for all individual tax returns (Form 1040, 1040A, or 1040EZ) or to request an extension (Form 4868). While an extension provides people living in the U.S. with an extra six months to file their tax return, payment is still due by April 17th. You can submit payment for tax along with the extension form.
Last day to make a retroactive contribution to traditional IRA, Roth IRA, Health Savings Account, SEP-IRA or solo 401(k) for the 2011 tax year. (However, if you get an extension, you will have until October 17th to fund a SEP-IRA or solo 401(k).)
June 15, 2012: Deadline for US citizens living abroad to file individual tax returns and to pay any tax due. You can request an additional 4-month extension (Form 4868). (You can actually request an automatic extension by April 15th.)
June 30, 2012: Deadline to file TD F 90-22.1 Report of Foreign Bank Accounts for the year 2011. This report is required if you have over $10,000 (in aggregate) held in foreign bank accounts.
October 3, 2012: Final deadline for self-employed persons or employers to establish a SIMPLE IRA for the year 2011.
October 15, 2012: Final deadline to file individual tax returns (with extension). Last day the IRS will accept an electronically filed tax return for the year 2011.
When to file U.S. tax returns
The IRS recommends that U.S. citizens living overseas start to file their tax returns now in order to ensure that they complete all the requirements before the June deadline.
Penalties for non-compliance
Providing expatriates act now to bring their records up to date with the IRS penalties will not be imposed. The IRS can, and will, impose a fine for failure to file the tax return equal to five per cent of the amount required to be shown on the return for each month to a maximum of 25 per cent. However, no penalty will be imposed on failure to file if no money is owed.
While the IRS are currently implementing an amnesty that is aimed at encouraging previously-delinquent expats to file their FBAR, there can be significant fines for those that fail to adhere to the requirements. This can be up to $10,000 USD for non-willful violations and the greater of either $100,000 USD or 50 per cent of the account balance for willfully failing to file.
Are expats relinquishing citizenship?
Many U.S. expatriates have expressed anger at the rules governing U.S. citizens living abroad and are choosing to relinquish citizenship in order to avoid paying tax in the United States: an estimated 1024 Americans renounced their U.S. passport during the first two quarters of FY 2011 alone. However, this doesn’t completely let such citizens off the hook and they will still be required to file income tax returns for the previous five years.
For a comprehensive guide to taxation for U.S. citizens living abroad, see our free guide to the U.S. Federal Tax Liabilities